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CFP - RISK MANAGEMENT, INSURANCE,
AND EMPLOYEE BENEFITS PLANNING
QUESTIONS WITH DETAILED VERIFIED
ANSWERS
First-to-die policy Ans: a. Pays upon the death of the first insured.
b. Used in buy-sell agreements and for mortgage protection, paying off
debt, and education expenses.
Second-to-die policy Ans: a. Used for estate liquidity purposes. b. Lower
cost than first-to-die or single-life policies.
7-pay test Ans: The accumulated amount paid under the life insurance
contract at any time during the first seven contract years that exceeds
the sum of the net level premiums which would have been paid on or
before such time if the contract provided for paid-up future benefits after
the payment of seven level annual premiums.
Modified Endowment Contracts (MECs) Ans: 1. Life insurance policies
are considered modified endowment contracts (MECs) if they fail the 7-
pay test.
2. Most single premium policies fail the 7-pay test and are classified as
MECs. Unlike other life insurance contracts, withdrawals and loans from
MECs are included in the policyowner's taxable income to the extent that
the cash value of the policy exceeds the premiums paid using LIFO
accounting.
3. Persons under age 591⁄2 may also be subject to an additional tax
penalty of 10% on both withdrawals and loans if there is a gain in the
contract. There is neither a penalty nor tax due on the return of basis in
the contract.
4. Once an MEC, always an MEC.
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Group Term Life Insurance Ans: 1. Group term life insurance premiums
up to the first $50,000 of face value paid by the employer are tax exempt
to the employee.
a. For any amount of group term coverage greater than $50,000, the
scheduled premium per Section 79 Table 1 cost is included in the
employee's W-2 compensation income.
b. To qualify for favorable tax treatment, a group life plan must be
nondiscriminatory.
Annuities Ans: Annuities provide a periodic payment (fixed or variable)
for either a fixed period (term certain) or for someone's (could be more
than one) lifetime (life annuity)
Premium funding methods (Annuities) Ans: Single premium deferred
annuity (SPDA)
Periodic premium deferred annuity (PPDA)
Single premium immediate annuity (SPIA)
Single premium deferred annuity (SPDA) Ans: a lump-sum premium
with an annuitization period deferred until some point in the future. The
premium earns interest that accrues tax deferred.
Periodic premium deferred annuity (PPDA) Ans: allows periodic, variable
contributions where earnings accumulate tax deferred and are distributed
sometime in the future.
Single premium immediate annuity (SPIA) Ans: the annuity payments to
the annuitant begin one payment period following the premium payment
(e.g., structured settlements, retirement plan distributions).
Annuity Payout Options Ans: 1. Fixed period—payments continue to the
annuitant for a specified term, and to a designee if the term exceeds the
annuitant's life. The insurer determines the amount of the payment based
on the period selected.
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2. Fixed amount—payments are made periodically in a fixed amount
determined by the annuitant. The insurer determines the length of time
for which payments can be made.
3. Straight life annuity—payments continue until the death of the
annuitant.
4. Life annuity with period certain—payments continue to the annuitant
for the annuitant's lifetime. However, if the annuitant dies before the end
of the guaranteed term, payments will continue to the designee or
beneficiary for the remainder of the term.
5. Joint and survivor—payments continue until the death of the last of
two annuitants.
Classification of Annuities Ans: 1. Fixed annuity
2. Variable annuity
3. Equity-indexed annuity
4. Pure longevity annuity
5. Deferred income annuity
6. Bonus annuity
Fixed annuity Ans: Premiums are invested in the general account of the
insurer.
a. The insurer bears the investment risk.
b. The annuitant receives a minimum guaranteed interest rate.
c. Upon annuitization, a fixed periodic payment will be determined
depending on the form of the annuity.
d. Suitable for a more conservative investor.
Variable annuity Ans: Premiums are invested in subaccounts
CFP - RISK MANAGEMENT, INSURANCE,
AND EMPLOYEE BENEFITS PLANNING
QUESTIONS WITH DETAILED VERIFIED
ANSWERS
First-to-die policy Ans: a. Pays upon the death of the first insured.
b. Used in buy-sell agreements and for mortgage protection, paying off
debt, and education expenses.
Second-to-die policy Ans: a. Used for estate liquidity purposes. b. Lower
cost than first-to-die or single-life policies.
7-pay test Ans: The accumulated amount paid under the life insurance
contract at any time during the first seven contract years that exceeds
the sum of the net level premiums which would have been paid on or
before such time if the contract provided for paid-up future benefits after
the payment of seven level annual premiums.
Modified Endowment Contracts (MECs) Ans: 1. Life insurance policies
are considered modified endowment contracts (MECs) if they fail the 7-
pay test.
2. Most single premium policies fail the 7-pay test and are classified as
MECs. Unlike other life insurance contracts, withdrawals and loans from
MECs are included in the policyowner's taxable income to the extent that
the cash value of the policy exceeds the premiums paid using LIFO
accounting.
3. Persons under age 591⁄2 may also be subject to an additional tax
penalty of 10% on both withdrawals and loans if there is a gain in the
contract. There is neither a penalty nor tax due on the return of basis in
the contract.
4. Once an MEC, always an MEC.
, Page | 2
Group Term Life Insurance Ans: 1. Group term life insurance premiums
up to the first $50,000 of face value paid by the employer are tax exempt
to the employee.
a. For any amount of group term coverage greater than $50,000, the
scheduled premium per Section 79 Table 1 cost is included in the
employee's W-2 compensation income.
b. To qualify for favorable tax treatment, a group life plan must be
nondiscriminatory.
Annuities Ans: Annuities provide a periodic payment (fixed or variable)
for either a fixed period (term certain) or for someone's (could be more
than one) lifetime (life annuity)
Premium funding methods (Annuities) Ans: Single premium deferred
annuity (SPDA)
Periodic premium deferred annuity (PPDA)
Single premium immediate annuity (SPIA)
Single premium deferred annuity (SPDA) Ans: a lump-sum premium
with an annuitization period deferred until some point in the future. The
premium earns interest that accrues tax deferred.
Periodic premium deferred annuity (PPDA) Ans: allows periodic, variable
contributions where earnings accumulate tax deferred and are distributed
sometime in the future.
Single premium immediate annuity (SPIA) Ans: the annuity payments to
the annuitant begin one payment period following the premium payment
(e.g., structured settlements, retirement plan distributions).
Annuity Payout Options Ans: 1. Fixed period—payments continue to the
annuitant for a specified term, and to a designee if the term exceeds the
annuitant's life. The insurer determines the amount of the payment based
on the period selected.
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2. Fixed amount—payments are made periodically in a fixed amount
determined by the annuitant. The insurer determines the length of time
for which payments can be made.
3. Straight life annuity—payments continue until the death of the
annuitant.
4. Life annuity with period certain—payments continue to the annuitant
for the annuitant's lifetime. However, if the annuitant dies before the end
of the guaranteed term, payments will continue to the designee or
beneficiary for the remainder of the term.
5. Joint and survivor—payments continue until the death of the last of
two annuitants.
Classification of Annuities Ans: 1. Fixed annuity
2. Variable annuity
3. Equity-indexed annuity
4. Pure longevity annuity
5. Deferred income annuity
6. Bonus annuity
Fixed annuity Ans: Premiums are invested in the general account of the
insurer.
a. The insurer bears the investment risk.
b. The annuitant receives a minimum guaranteed interest rate.
c. Upon annuitization, a fixed periodic payment will be determined
depending on the form of the annuity.
d. Suitable for a more conservative investor.
Variable annuity Ans: Premiums are invested in subaccounts
